3x PE, 7.9% DY & Some Free Stuff

If you are willing to turn over enough stones in the stock market, there will always be bargains hiding somewhere out there. Here are a couple ideas to consider:

Wescoal: 2.9x Price Earnings & Growing

I have written about Wescoal (WSL) before a number of times and I hold a good chunk of it in AWSM Fund.

See “What Happens When a Junior Miner Grows Up?” for more detail as to the company.

Despite these improving fundamentals, Wescoal’s share price has fallen around -30% in the last three months (Exxaro is up some c.+20% over this same time period!) and now offers itself up on a c.3x Price Earnings (PE). This is assuming my FY 18E Normalized EPS forecast of c.50 to 60cps is correct and/or annualising its Normalized EPS at H1:18.

Then, consider the fact that Wescoal should extract synergies from Keaton’s assets, it can bring Moabsvelden online as another major mine and that the coal spot price has been rallying… All this remains as (free) upside in the Group at this price.

So why is Wescoal’s share both so cheap and why has it fallen further recently?

Only one reason that I can honestly see: Eskom.

Wescoal sells the majority of its coal on contract to Eskom (I could stand corrected, but its c.three-quarter goes to Eskom). It is not that Wescoal does not make a tidy profit on this contract, but the fact that the market is worried that Eskom may skip on its bills or–worse–go under entirely.

This is a risk, but you have to understand that in this scenario, South Africa goes under. It is unlikely that South Africa and its Government will be left standing if Eskom is allowed to fail (given the degree of cross-surety between the entities).

Hence, this is likely the last thing to go wrong in South Africa. Besides, at 3x PE, surely this is more than priced in? Even if Eskom goes under, Wescoal could still export the coal… In fact, coal is USD-priced and in the scenario where Esko goes under, the ZAR will tank and Wescoal’s exports will become higher margin, surely?

Thus, I think this one is worth looking at. You don’t get all too many profitable, growing shares on a 3x PE!

Metrofile: 7.9% Dividend Yield & Growing

Metrofile (MFL) offers a filing and document solution Group that is both dominant regionally and the only way to actually profit from the growing bureaucracy (which always generates paper trails!).

The underlying business is deeply cash-generative, but low growth. Read Metrofile & Share Buybacks for some corporate background.

Metrofile’s share price is currently trading on a 7.9% dividend yield (DY). Yes, that is almost 8%! This is higher than some listed property companies…

Why?

Well, the market believes that the Group is ex-growth, or–worse–that their core boxing business is obsolete.

Firstly, the latter is wrong. Document solutions, as paper, is here to stay and will not change. Sure, this core business line is ex-growth, but the banks need to FICA or the telcos need to RICA are not going away. Neither are compliance records nor legal documents, contracts, and so on. In fact, technology just offers Metrofile more efficient ways of storing, scanning, processing, and recalling documents…

Secondly, the Group has recently acquired a Kenyan business (very exciting!) and launched an internal technology initiative (I may write on the details of this later, but it is exciting too). Both of these initiatives are pro-growth while the Group’s African business is also growing faster (c.10% to +20% y/y) than its domestic one (+2% to +5% y/y).

In other words, at a 7.9% DY, the market is pricing Metrofile for going nowhere slowly. I disagree and think the Group- is far from ex-growth. In fact, I think over the next couple of years, Metrofile is building itself up for another decade of growth.

Watch this space…

Some Free Stuff (With Risks)

There is a whole host of free stuff out there in the stock market right now. Yes, much of it comes with risks, but without risk, you would probably have to pay full value for these too. In other words, hand pick your risks here…

  • Hosken Consolidated Investments (HCI): HCI’s Tsogo Sun investment is currently worth a bit over c.15000cps per HCI share. That means that you are getting HCI’s investment into Niveus, EMedia (eTV), Deneb and its coal mining assets all free. Including these assets, one could argue that HCI was worth well into the 17000cps range. I like this one and hold it in the Fund.
  • Sandown Capital (SDC): Sandown Capital has three major underlying assets that I am aware of: its hedge fund investments, its holding of Stenprop (STP) and its anchor shareholding in Consolidated Infrastructure (CIL). Even if I assume CIL is worthless (Why We Sold CIL), the investment holding company is trading at a c.50% discount to its other assets. While super new and illiquid, this is also super cheap.
  • Brait SE (BAT): Yes, we all know that New Look is worthless. Yet, even if you write New Look to zero (which Brait management have done!), Brait is still trading at a c.30% discount to its NAV. Will New Look survive? Who knows (but my guess is ‘no’). Still, assuming no dilution (i.e. rights issue) in Brait and you suddenly have a well-priced asset with at least a free business hidden in its valuation. And, if New Look turns around, well, then you just have free upside.
  • Stellar Capital Partners (SCP): Not that I am advocating buying this stock, but it is worth noting that Stellar Capital shares are trading at the same value as their investment in Prescient Financial Services (worth c.64cps per Stellar Capital share). That means that you are getting c.24cps per SCP share free of Torre Industries (TOR) and getting Telumat, Cadiz, Praxis, Amecor and other businesses entirely free. Just saying…

This is just a short list of some ideas for you to look at going into 2018.

No, these are not my “top picks” (I hate that question, as real stock picks are made in context of a portfolio), but I do think that many bargains lie all over the place in the small cap sector in South Africa. These are just a couple.

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